Is Russia's "Bullet Proof" Economy Ready to Blast Off?

Newsweek and other western mainstream media are turning the corner on anti-Russia unreason. The massive sanctions on Russia have led to a reversal of fortunes, but not the result western leadership envisioned.

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Watching the tide of foreign policy, influence, and business turn concerning Russia, it’s a rewarding experience for all the moderates of the world. Bill Powell at Newsweek assures the journalistic faithful of Earth there’s even hope for mainstream media today. Despite US and EU sanctions aimed at crippling the Russian economy, Vladimir Putin’s economic endeavors of late have apparently saved the Russian nation’s day.

The Newsweek article, “What Sanctions? The Russian Economy Is Growing Again,” is symbolic of a break in the negative trend toward Russia in many ways. Powell takes something of a leap of faith and credibility in outlining how recent detente was "not exactly what the West was hoping for." Against what seemed like insurmountable economic odds, Putin’s ruble has rebounded, the stock market has out performed most competing ones, foreign exchange reserves are up, and the Russian government’s revenue has even exceeded expectations.

Russia May Be Bulletproof Economically

<figcaption>President Vladimir Putin meets with Deputy Prime Minister Dmitry Rogozin and Roscosmos Head Igor Komarov.</figcaption>
President Vladimir Putin meets with Deputy Prime Minister Dmitry Rogozin and Roscosmos Head Igor Komarov.

While crude oil and energy prices have hit Russia companies hard, they’ve empowered Russia industry to some of the highest profits in recent history. This and other “unexpected” stimulus as a secondary result of sanctions spell a kind of policy disaster in Washington, London, and Brussels.The meat of this story from Newsweek can be found in the MICEX index, as well as on the micro level with companies like steelmaker Severstal (New Renault-Nissan deal) . For those unfamiliar with heavy industry, steel for auto makers and other markets depend, price-wise, on the costs of energy used to produce. When I was at Nucor Steel in America, other than the costs of scrap and other raw materials, the electricity to power steelmaking was enormous and critical, a make-or-break commodity. The long and short, in competitive manufacturing price, opens or closes markets. The dive in energy costs, combined with other cost/revenue benefits Powell describes, have helped Putin’s finance ministers’ make a fiscal shift toward growth.

CEO of Severstal Alexey Mordashov
CEO of Severstal Alexey Mordashov

Mainstream Media Cracked

While the Newsweek analyst falls short of being a moderate where West-East détente is concerned, his conclusion on “Putin” is sound. The Russian leader that western democracies have tried to destroy by hook or crook, is simply not going anywhere. What’s so interesting about the Newsweek piece is the contravening news from the likes of BBC and others in the same day. BBC’s headline reads: “Russians reel from economic crisis,” this from a diplomatic correspondent and award winning Russia expert Bridget Kendall. Given the disparity in the Newsweek/Bloomberg view on Russia’s resilience, and BBC’s take via Kendall, it appears journalistic competition may still be alive and well. For Kendall’s part, she’s clearly not looked at the economic data. Her article speaks of closed factories and shop owners in distress, when this is simply not the case. Even here in Germany one can find For Rent signs all over, dilapidated factories closed, and inefficiency rewarded with bankruptcy. It seems Kendall has fallen victim to BBC’s bias, or else she’s helping formulate it.

Source Bloomberg
Source Bloomberg

However one forms up a “reality” matrix for investing decisions, Russia’s leadership has clearly outdone all their opposition in the last months. The economic and media war against Putin and Russia that was so evident when the ruble crashed some months ago is crumbling before our eyes if I don’t miss my guess. We see this in the aforementioned BBC disharmony with the likes of Bloomberg, Forbes, and even the Washington Post of late. The chart below reveals a separate economic reality. Forbes’ top investment guru, Kenneth Rapoza, reported only yesterday, Brazil and Russia as “buys” in a supposed failed sector. Rapoza is smart and tuned-in to the investor’s “Holy Grail” – yield. I could go on, but the trend seems clear: the mainstream has been forced to revert to reality.

Take Away

Weighing what is certainly a break in media reporting on Russia and other factors we’re seeing in EU and US politics, it’s safe to say sanctions on Russia were and are a failed strategy, and one that is backfiring, too. A report from Sahra Wagenknecht, the vice president of the German Left party and German MP, we ran the other day foretells of this backlash. Spurred by Washington and London, the EU enacted sanctions that were supposedly intended to force Russia’s hand. Today we are witnessing Greece, Italy, Spain, Hungary, the Czech Republic, and other nations bucking not only those sanctions, but the anti-Russia rhetoric as well. Wagenknecht claims these policies destroyed Ukraine and damaged Europe at the same time. I think the same will eventually be said for the US and the UK, when all is said and done. The euro has taken a big hit, the dollar has new competition from China and Russia, and a general shift away from the US toward the BRICS is paramount now. Even considering the singular potential of the Russia economic/investing internal market, no country actually has more growth potential. The image below from Gazprom showing 2012 energy capacity is symbolic. 

Installed capacity as of late 2012 early 2013 inside Russia
Installed capacity as of late 2012 early 2013 inside Russia

Once all the facts and rhetoric are weighed sometime in the near future, the foolhardy strategy to questionable ends will be revealed in full. Whether or not the Ukraine situation is mediated fully, the escalation of West-East tension via punishing Russia was ill advised. For investors, the next move will be to take advantage of a near bullet proof market. After all, Russia’s economy was hit by everything but the kitchen sink. My hat is off to Bill Powell, and all those living in the real world. 

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